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[Statement - Mathavious]

OVERVIEW OF THE REGULATORY ENVIRONMENT IN THE BVI

Robert Mathavious, MD/CEO, BVI Financial Services Commission

Hong Kong, 10 May 2004

Ladies and Gentleman:

May I say what a genuine pleasure it is to be here today.  Both at home and abroad, the BVI Financial Services Commissions places great importance on working in tandem with the private sector.

Hong Kong is also a key strategic partner for the BVI financial services industry and I always value highly my visits here and the chance they give me to hold discussions with practitioners such as yourselves.

I must also congratulate the International Finance Centre on the timing of this meeting today.  At a moment of considerable innovation and opportunity in the BVI, I consider it particularly valuable that you should hear at first hand from those in the public private sectors alike who have been directly involved in developing the new measures.  Second-hand accounts are rarely as accurate.

Appropriate regulation

As you are well aware, we meet at a time when international bodies, supa-national organizations, policy makers, legislators, the international media, and standards-settings organizations continue to focus with laser-like intensity on the activities of financial centres everywhere.

Regulators everywhere agree that this requires constant vigilance and regular updating o our regulatory standards.  It also requires us to stay ahead of the curve and control the process of regulation rather than have it forced on us by the international community.

At the FSC, our ethos is to promote a high standard of corporate behaviour for the protection of the clients as well as for the reputation of the BVI.

We work hard at creating a genuine partnership of mutual trust between the private sector and the government so as to ensure the right environment for legitimate business.

We also demand high standards of integrity and sound financial management of ourselves and from all our licensees.

The FSC docs not believe in regulation for its own sake.  Far from it.  On the contrary, we believe that too much regulation or over-regulation produces unnecessary bureaucratic burdens, stifles innovation, hampers success and destroys business.

However, we also believe that too weak or inadequate regulation risks leading to avoidable failures, creates a lack of confidence and also destroys business.

A balanced and risk focused approach is therefore necessary.  A commonsense regime with a light touch.

Accordingly, our regulatory norms are fashioned on three independent principles:  self-regulation, market discipline and official oversight.

Our emphasis has shifted from regulation to supervision, focusing more on internal controls and risks management systems.  We are now moving from off-site inspection of documentary evidence to on-site compliance inspections.

Our approach is thus not overly prescriptive but seeks to set the parameters of what is acceptable and what is not.

Underpinning this is the building of a consensus with the private sector and other key stakeholders.  We believe that having a consensus helps to maintain international domestic confidence and enables the market to grow and innovate.

This is why the Financial Services Commission has set up a range of consultative committees with the private sector, looking at industry liaison, mutual funds, company law reform, insolvency, insurance and banking.

Our recent Insolvency Act and our modern VISTA trust legislation – both much welcomed internationally – were developed in close consultation with the BVI industry and international experts.

Companies Acts

In a similar way, the existing (local) Companies Act and the International Business Companies (“IBC”) Act are also being reviewed, updated and amalgamated into a single corporate statute.  The aim is to bring this into force in 2005.

After twenty very successful years, it was time to take stock.

Our intention is that the new Companies Act will retain all the virtues of the IBC that we have come to know and love.  But following extensive discussions with our private sector, it will be enhanced and made more attractive to clients.

In short, we expect that the new legislation – as well as extending the same zero tax regime enjoyed by IBCs to local companies and thereby bringing us into line with EU Code of Conduct on Business Taxation – will make the BVI company an even better international proposition and cement our position as the clear, first-choice offshore incorporation destination.

Although the new Act is still under development, I can assure you that there will be improvement both in terms of new features, such as the introduction of a separate SPC (or “special purpose”) corporate structure, and in terms of upgrading existing processes, such as the procedures concerning the registration and prioritization of charges.

As with the original IBC Act of 1984, these improvements blend the inputs of the local private sector, key external strategic partners and the BVI government.

International Participation

This consensual approach has also been of considerable assistance in helping the BVI participate actively in shaping international standards.

For example, as part of a select working group set up under the auspices of the Offshore Group of Banking Supervisors (OGBS), the BVI helped develop a statement of international best practice for the regulation of trust and corporate service providers. 

An din our capacity as co-chair of the Ad Hoc Group on Accounts set up by the OECD, the BVI argued successfully against unreasonable demands, such as auditing and filing by all offshore companies.

We are also active in many other anti-money laundering and supervisory grouping, such as the Caribbean Financial Action Task Force (the CFATF) and the Egmont Group of Financial Intelligence Units.  We were part of the working groups that revised the FATF’s Forty Recommendations.

We further chair the Offshore Group of Collective Investment Scheme Supervisors, and are keen members of the International Association of Insurance Supervisor and the Offshore Group of Insurance Supervisors.

Recently, we were pleased to be the first Caribbean jurisdiction invited to join the International Association of Insolvency  Regulators, whose members include Hong Kong, the United Kingdom and the United States.

This active international engagement enables us to work together with the business community from an early stage to develop appropriate strategies to protect our industry.

It also means the international community is increasingly recognizing the BVI’s determined commitment to international regulatory standards and best business practices.

IMF

The IMF’s positive assessment of regulation in the BVI is one recent example of this.  The IMF review joins a long line of previous favourable assessments by KPMG, the Financial Action Task Force (FATF), the CFATF and even the OECD.

I will not pretend that these independent reviews are not at times exhausting.  But they provided a much-needed new perspective on our regulatory framework and market practices.

And we welcome the opportunity to have it confirmed that the BVI financial services sector is prudent, pragmatic and compliant with – and in some instances exceeds – the relevant international standards.

The IMF came away satisfied that our practices were proportionate and appropriate, given the context and structure of our market.

Of course, they also identified  some areas where we could enhance current arrangements.  We are already addressing these with the objective of strengthening the safety and stability of our financial services sector.

OECD

As regards the OECD’s notorious “harmful tax competition initiative” (or HTCI), which has occupied so much of our time since its launch in 1998, this has reached an interesting turning point.

The OECD is now on the defensive.  As their 2004 progress report confirms, the project can only go forward on the basis of a level playing field, the practical details of which are currently under lively discussion.

Most significantly for this audience, the OECD is now planning to involve more finance centres.  This may have implications for Hong Kong and Singapore, as well as for countries in Latin America, which have so far not been subjected to the OECD’s detailed scrutiny.

The OECD’s Global Forum on Taxation is expected to develop this approach at its meeting next month in Berlin.  As they say, watch this space.

The FSC

I should perhaps mention here that, although the Financial Services Commission informs the BVI’s responses to international initiatives, the Commission is independent and not part of government.

The Financial Services Commission Act of 2001 established the Commission as an autonomous authority, with the task of regulating insurance, banking, trustee business, company management and mutual funds business, as well as the registration of companies limited partnerships, intellectual property and ships.

Ongoing legislative reform will shortly extend our scope to insolvency practitioners, money transmitting agencies, and other non-banking financial intermediaries.

Although the FSC is independent, it is not a law unto itself.  An autonomous Board of Commissioners supervises us.  And we must provide annual accounts, work plans and periodic management reports to the BVI Legislative and Executive Councils for review and debate.

Also, the Financial Services Appeal Board, which is comprised solely of the private sector, can hear appeals against our decisions and refer matters back to us.

This wide-ranging accountability helps maintain the considerable support we enjoy within the BVI.

I would now like to turn briefly to a number of specific matters.

Legislative reform

First, it may be of interest to note that our ongoing legislative reform programme is also expected to result in amendments to the Banks and Trust Companies Act, the Companies Management Act, the Mutual Funds Act and the Insurance Act, as well as new codes of practice in respect of banking and mutual funds.

These are all based on valuable private sector input, and the relevant bills will become available this summer.  The aim is to have them on the statute books by next year.

Exchange of information

In all that we do, a crucial issue for us is the protection of clients’ rights.  The rights of individuals have always been fundamental importance to the BVI.  Our own history teaches too strong a lesson for this to be otherwise.

In the area of exchange of information, the BVI naturally plays its proper role in combating criminality through our Criminal Justice (International Cooperation) Act, our Financial Services (International Cooperation) Act and our mutual legal assistance treaties.  These allow for the appropriate exchange of information for investigations and prosecutions and regulatory matters.

As to what is and is not appropriate, the BVI courts, the Commission and the BVI government are very clear that all requests for information must meet a requisite “means test” and not just be fishing expeditions.  Only bona fide cases that pass the means test are facilitated.

In this way, the BVI’s upholds its commitment to fighting cross-border, white –collar crime while safeguarding the privacy and confidentiality of legitimate transactions.

Insolvency

With regard to insolvency, our new Insolvency Act will come into force by 30 June 2004.

The Act draws on a benchmarking exercise of the best insolvency regimes and has similar themes and nomenclature to UK law.

It covers personal and corporate insolvency and provides both liquidation and rehabilitation procedures.

Receivership always was, and will remain, a recognized procedure in the BVI, and the new Act extends this by introducing the concept of Administrative Receivership.

On a worldwide scale, the new regime can be considered “creditor friendly”.  Good corporate governance will be encouraged.  For example, director disqualification procedures are allowed for and the FSC will be responsible for a new system of licensing and supervising insolvency practitioners.

UNCITRAL, Model law

I am aware of comments that have been circulating regarding the inclusion of UNCITRAL model provisions in the Insolvency Act.

Whilst I am neither a lawyer nor an insolvency practitioner, I appreciate that international cross-border insolvency – with assets and operations in multiple jurisdictions – is one of the most complex areas in modern insolvency law and practice.

The new BVI legislation includes provisions, which are very close to the UNCITRAL model law on cross-border insolvency.

We see implementation of the UNCITRAL – inspired provisions as very much a level playing field issue.  Although we considered it wise to build in the provisions when drafting the new law, we did so in the knowledge that the UNCITRAL, model presupposes the existence of widespread reciprocity.  This is an absolute prerequisite for us.

Hence the provisions will not come into force at the same times as the main Insolvency Act.  If and when we think they would benefit BVI companies, we will re-consider implementation.  This naturally presupposes that the UNCITRAL model becomes a commonly available global standard.

FATF

The same level playing field approach will guide our implementation of the FATF’s revised 40 Recommendations, which extend the anti-money laundering framework to lawyers and other gatekeepers.  In implementing this, the BVI sees no advantage in jumping ahead, particularly as our systems are already fully  compliant with the 40 Recommendations.

As regards the area of “eligible introduces”, this remains under review.  A joint anit-money laundering committee will shortly be looking at it and a solution is expected before the autumn.

Bearer shares

Turning now to bearer shares, as you may be aware, most of the 500,000 IBCs registered in the BVI currently have the power to issue such shares.  Whether they have in fact issued any and have bearer shares outstanding is not certain.

The new International Business Companies (Amendment) Act of 2003 requires all bearer shares to be held by either an “authorized” or “recognized” custodian and for bearer shares to be immobilized.

Although an initial deadline of the end of this year was envisaged, following extensive consultation with industry, a further IBC (Amendment) Act in 2004 set a revised deadline for immobilization of 31 December 2010.

This was a key recommendation of a special private sector panel which the FSC commissioned to examine the issue.  A further example of our successful private-public sector cooperation in action.

The panel recommended the traditional route of amending the Memorandum and Articles of Association to prohibit the issue of bearer shares by companies that have not already issued, or intended to issue, bearer shares.  They proposed, however, a seven-year transition period before the new legislation took effect for existing companies.

So the situation now is that for the first four years, matters will essentially stay as they are for existing IBCs.  After that, for a further three years, those IBCs that retain the power to issue bearer shares will pay a small increase in their license fee.

Meanwhile, any IBC that amends its Memorandum of Association to prohibit the issue of bearer shares is expected to file at the Registry of Companies, together with an extract of the amendment, a declaration to the effect that no bearer shares are in issue.  This applies whether or not the IBC is incorporated before 1 January 2005, which is the effective date of the 2004 IBC Act.

Authorised and recognized custodians

For those companies that wish to place bearer shares with custodians, the crucial issue of the approval and recognition of custodians is governed by the separate Financial Services Commission (Amendment) Act of 2004, this being  a regulatory matter.

This Act will come into effect on 1 July 2004, while the two IBC Amendment Acts will take effect, as mentioned, six months later, on 1 January 2005

This means that companies formed before 1 January 2005 will have until 31 December 2010 to comply, whereas companies formed after 1 January 2005 must comply from their date of formation.

To enable custodians to be in place by January 2005, the Commission will consider applications for custodians from 1 July 2004.  There will be two categories:  “authorized” and “recognized”.

Those eligible for consideration as authorized custodians are:

1. Service providers licensed under any BVI financial services legislation; or
2. A body corporate incorporated or formed outside the BVI that is not a resident in, and does not have a place of business in, our territory.

Applicants for approval as authorized custodians will have to satisfy the Commission that they meet the “fit and proper” criteria and that they have the necessary security and compliance systems and procedures in place for safe custody of their bearer shares.

Those eligible for consideration as recognized custodians are any investment exchange or clearing organization that operates securities clearance or settlement systems in a jurisdiction which is an FATF member.

To assist potential applicants for custodian status, the Commission has issued an Aide Memoire on the criteria for approval of authorized custodians of bearer shares.  This is available on the Commission’s website at www.bvifsc.vg

The Aide Memoire address, inter alia, the duty of custodians, the approval criteria for custodians and the grounds on which the Commission may revoke approvals.  It contains a list of recognized custodians already approved by the FSC.

These measures enable the BVI to comply with all international standards, including the FATF’s 40 Recommendations.  The Commission encourages all potential custodians to apply early so that the approval process is completed well in advance of 1 January 2005.

Conclusion

I trust that this overview of the BVI’s approach to regulation and of recent innovations has been helpful.

Above all, I trust it has helped demonstrate that the Financial Services Commission is committed to balancing effective regulation with commerciality and the need for international competitiveness.

And that we are committed to working closely with the local private sector and the international business community in a genuine partnership to ensure that the BVI’s financial services offerings continue to provide a legitimate and genuine solution to international needs.

I look forward very much to your questions in the panel discussion.  Thank you. 

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